Bidding Wars Are Back
According to an article published by the Wall Street Journal, some hot housing markets are once again experiencing bidding wars, with multiple offers, far over asking price. Collingwood’s Chairman, Tim Rood, joined Neil Cavuto today to discuss the trend. Clearly, low inventory is playing a role, but apartment construction that can’t keep pace with demand, which results in higher rents, is also a factor, as is continuing lack of home equity by some homeowners. Rood explains that potential home sellers are unable to pursue the traditional “move-up” path. He says that, “There are probably 10 plus million people who don’t have enough equity or insufficient equity to actually sell and then buy and cover the transaction costs.” As a result, he continues, “builders are focusing on multifamily, they’re looking at apartments–that’s where they see the demand. And, when that happens, it kills the starter homes.”
As for what this means for housing, Rood believes the hot markets that are seeing bidding wars do not have a lot of opportunity for first time home buyers. “You’re not going to see first-time millennial buyers have a chance getting into those markets,” he says. On the other hand, he says, “you see other more normal markets – Atlanta, Des Moines, Denver, Dallas – that are growing based on great fundamentals. You’ve got strong employment, strong economies, starter prices that you can afford,” Rood continues.
However, first-time home buyers are the foundation of the housing market. When they are not served, the whole system suffers. Rood told Cavuto, “The housing market works like a ladder. You’re going to have a starter buyer that then moves up and who frees up that inventory,” helping someone who’s looking to get into the market and the person who is selling, which allows this household to then “buy up.” “It becomes a virtuous cycle, all the way up to people who are retiring and downsizing. If you can’t satisfy that starter buyer who can’t save enough money for a down payment because they are paying too much in rent, or the inventory isn’t available or isn’t desirable, the whole thing breaks down.”
Furthermore, while interest rates historically influence a prospective homebuyer’s decision, the other factors cited by Rood have prevented the Fed-suppressed rates from triggering a full rebound of the housing market. James Bullard, President of the St. Louis Federal Reserve Bank indicated today that there is a more than 50 percent chance of interest rates rising in September. So will that affect buyer behavior? Rood says, “There’s no doubt that people who have the ability are going to view a potential rate increase as kicking them off the fence.”
Finally, Cavuto asked Rood if now is a good time for a young couple to buy their first home. Rood responded saying, “For a hundred years there has been a direct correlation between homeownership rates and income growth and wealth appreciation. Those things haven’t changed, notwithstanding the housing crisis. Absolutely, anybody who has the opportunity to purchase a house in a good market should . . . You’re not going to be afforded many other wealth-creation opportunities like homeownership. The cautionary tale is behind us. The future is bright. “